ALBANY, N.Y. -- Morgan Stanley will pay US$3.2 billion in a settlement over bank practices that contributed to the 2008 financial crisis, including misrepresentations about the value of mortgage-backed securities, authorities announced Thursday.

The nationwide settlement, negotiated by the working group appointed by President Barack Obama in 2012, says the bank acknowledges that it increased the acceptable risk levels for mortgage loans pooled and sold to investors without telling them. Loans with material defects were included, packaged into the securities and sold.

Morgan Stanley said it previously reserved funds for all related amounts. The bank acknowledged an agreement in principle for the federal settlement of $2.6 billion in a regulatory filing a year ago.

The Justice Department said the $2.6 billion federal penalty to resolve claims about the bank's marketing, sale and issuance of those securities is the largest piece of settlements with the working group that have totalled approximately $5 billion. Illinois will get $22.5 million in the settlements announced Thursday.

For New York state, the settlement includes $400 million of mortgage reductions and other consumer and community relief, as well as $150 million in cash. State Attorney General Eric Schneiderman co-chairs the working group.

"Today's settlement will bring money to the families and communities that need resources the most, while helping New Yorkers avoid foreclosure and spurring the construction of more affordable housing statewide," Schneiderman said.

The $400 million will go toward the creation and preservation of affordable rental housing, land banks, code enforcement, communities purchasing distressed properties, and principal reductions for homeowners, according to the attorney general's office.

The New York-based investment bank reported a fourth-quarter profit of $908 million. It recorded $3.1 billion in legal expenses in 2014 for settlements with state and federal regulators over its role in the housing bubble and subsequent financial crisis.

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